Economic Instability Chapter 13 Section 1 In this section, you will learn that business cycles are alternating increases and decreases in the level of economic activity Economic growth is something that is beneficial to almost everyone. However, we cannot take economic growth for granted. 1/1/2019

Business Cycles Regular increases & decreases (business fluctuations) in real GDP Can interrupt economic growth 1/1/2019

Business Cycle Phases Recession – Decline in GDP for at least 6 months Peak – When GDP stops expanding Trough – When GDP stops declining Expansion – Period of growth in GDP Decline in GDP lasting at least 6 months. Point in time when GDP stops expanding and begins to decline. Point in time when GDP stops declining and begins to expand. Period of uninterrupted growth of GDP. 1/1/2019

Trend line Growth path the economy would follow if it were not interrupted by alternating periods of recession & recovery Depression- very severe recession Large # of unemployed people Decline in income 1/1/2019

Business cycle causes Changes in investment spending Innovation & imitation Monetary policy decisions External shocks There is a direct relationship between bus. Investment & expansion in a cycle Innovation forces competitors to develop even better products which helps growth Interest rates impact the amount of borrowing that is done by consumers I.e. increase in oil prices, wars, and international conflict 1/1/2019

Business Cycles in the U.S. The Great Depression Causes Big gap in distribution of income…easy credit made borrowing easier but people went into debt Recovery & Legislation Increased gov. spending on WWII…Legislation- FDIC protected investments 1a. Big gap in distribution of income…easy credit made borrowing easier but people went into debt (this is scary!) 1b. Increased gov. spending on WWII…Legislation- FDIC protected investments 1/1/2019

Forecasting Business Cycles Using everyday economic statistics Leading economic indicator Composite index of leading economic indicators GDP=C+I+G+(X-M) 1a. Helps to predict which direction we are heading (ie stock mkt) 1/1/2019

Section 2 Inflation Economic instability is not limited to fluctuations in the level of GDP. Changes in prices can be equally disruptive to the economy. 1/1/2019

Inflation Increase in the general level of prices for goods & services Deflation- decline in price Both situations are harmful to the economy and should be avoided whenever possible 1/1/2019

Measuring Prices & Inflation Price index Statistical series used to measure changes in price level over time Consumer price index (CPI) Tracks monthly changes in price of a representative sample (market basket) of consumer items Base year Year that serves a comparison for all other years 2. Market basket is updated every ten years to account for changes in consumer buying habits 1/1/2019

Types of inflation Creeping Hyperinflation Stagflation Relatively low (1-3%) Hyperinflation In excess of 500% per year Stagflation Slow economic growth accompanied by inflation #3…1970’s…high price of oil made gas very expensive but we were going through a recession which led to high levels of unemployment 1/1/2019

Causes of inflation Demand-pull Cost-push Wage-price spiral High demand (shortages) by all sectors leads to price increases Cost-push Rising input costs (I.e. energy & organized labor) drive up the cost of products to the consumer Wage-price spiral Higher prices force workers to ask for higher wages Excessive monetary growth 4. Larger supply of money or credit in the economy increases someone’s purchasing power. When people spend this additional money, they cause a demand-pull inflation that drives prices up 1/1/2019

Consequences of inflation Reduced purchasing power Unable to buy as much as in the past Distorted spending patterns May not be able to afford expensive things (ex. House or car) Unable to buy as much as in the past May not be able to afford expensive things (I.e. house or car) sound familiar! 1/1/2019

Section 3 Unemployment 1/1/2019 Approx. half of the people in the U.S. belong to the labor force, and at any given time millions are without jobs. Sometimes this is because they choose not to work, as when they have quit one job to look for another. In most cases, however, people are out of work for reasons largely out of their control. 1/1/2019

Labor force The sum of all persons age 16 and above who are either employed or actively seeking employment The following people are excluded Military People in jail People in a mental health facility First…to understand the severity of joblessness, we need to know how it is measured and what is overlooked. The measure of joblessness is the unemployment rate, one of the most closely watched and politically charged statistics in the economy. 1/1/2019

Unemployed Persons People available for work who made a specific effort to find a job during the past month Collected by census workers who turn it over to the BLS (Bureau of Labor Statistics) for analysis & publication Released to the public monthly First…the process of deciding if someone is able to work, willing to work, or even at work is more complicated than most people realize. In the middle of any given month, about 1,500 specialists from the BLS begin their monthly survey of about 60,000 households in nearly 2,000 counties covering all 50 states. 1/1/2019

Unemployment rate # of unemployed persons / Labor Force Expressed as a percentage of the entire labor force Does not include: Underemployed workers Overqualified workers Part-time workers who want full time “discouraged workers” Gave up looking for work…not unemployed anymore because they’re out of the labor force 3. Some people are considered employed when they only hold part-time jobs…or they may be overqualified for their current job 4. Many people drop out of the labor force and are NOT included as unemployed because they ARE NOT looking for work. 1/1/2019

Sources of unemployment Frictional – in between jobs Structural – fundamental change in economy Outsourcing – hiring outside firms to do work for you Technological – ex. ATM’s replacing bank tellers Cyclical – Recessions cause layoffs Seasonal – job is only in demand for part of the year Workers are in between jobs for one reason or another…usually a short-term condition Caused by a fundamental change in the economy that reduces the demand for some workers…I.e. change in consumer taste or a fundamental change in the way a company operates 2b. Hiring of outside firms to perform non-core operations to lower operating costs…I.e. moving customer service operations to another country where the labor is cheaper. 3. Caused by technological developments or something where a workers’ skills become obsolete…I.e. reduced demand for bank tellers because people use ATM’s or do their banking on-line. 4. Employment directly related to swings in the business cycle…I.e. layoffs due to a recession 5. Caused by annual changes in the weather that reduce demand for jobs 1/1/2019

Costs of instability GDP gap – difference between actual & potential GDP Misery index – Inflation + Unemployment Uncertainty Political instability Crime, poverty, & family instability Difference between the actual GDP & potential GDP that could be produced if all resources were fully employed. Sum of inflation & unemployment rates…an unofficial statistic When the economy is unstable, a great deal of uncertainty exists. Workers may not buy something because of concern over their jobs. This uncertainty translates into many consumer purchases that are not made causing unemployment to rise When times are tough and voters are dissatisfied the incumbent is often voted out of office Recession, inflation, & unemployment can lead to higher rates of crime and poverty. They can contribute to problems such as fights & divorce when individuals and families face uncertainty because lost jobs and income make it difficult to pay the bills. 1/1/2019